CONSERVATION EASEMENTS regulation requires that the federal deduc-tion for this contribution be reduced by the amount of the preservation credit, from $1 million to $600,000. Because Virginia tracks federal charitable deductions, the donor’s Virginia charitable deduction will also be reduced to $600,000. In effect, the new regulation treats easement donations for which tax credits are available as bargain sales. The Treasury Department is considering whether credits for which offsets are required should be recog-nized as having a basis. Under current law, tax credits issued in exchange for easement donations are considered to have neither basis nor holding period. 8 Under current tax rules, when a tax credit is sold, as is possible with preservation credits, the entire amount of net proceeds is taxable. 9 According a basis to pres-ervation credits could be a signifi cant benefi t to Virginia easement donors, depending upon how (and if) the Treasury Department fi gures that basis. Although the credit offset reduces overall tax benefi ts, when the value of the preserva-tion credit is taken into account, tax benefi ts remaining are still about 80 percent of what they were prior to the offset requirement. Conservation easement donations in Virginia continue to generate some of the most sub-stantial tax benefi ts in the nation. 10 2. Building Envelopes Many conservation easements allow a land-owner to construct or locate new build-ings, including residences, on the easement property. To avoid having the location of such new structures confl ict with the conservation purposes of the easement (thereby risking the deduction) frequent practice was to require new structures to be located within building envelopes designated in the easement. To provide fl exibility, easement documents often allowed building envelopes to be relocated subject to the prior consent of the easement holder. A recent tax court decision 11 ruled that allowing the relocation of building envelopes, even subject to consent of the easement hold-er, violated the requirement that the easement be perpetual. This decision is on appeal. However, even if overturned, the tax court has repeatedly demonstrated its unwillingness to comply with appellate court rulings with which it disagrees unless such compliance is mandatory. 12 www.vsb.org This decision creates a drafting challenge for conservation easements reserving the right to future structures, particularly dwellings. If soils within a building envelope designated in the conservation easement for residential use can’t perc, for example, the building envelope may be unusable. However, because of the Pine Meadow ruling, the eas ement document cannot allow designation of an alternative, leaving the landowner with a useless building envelope. Postponing the location of a build-ing envelope until the landowner is ready to use it, which would avoid this problem, raises perpetuity issues similar to those addressed in the Pine Meadow case. This is true even if the easement holder must pre-approve the location. One alternative to avoid such a problem is to create multiple building envelopes from which the landowner may choose. Once a choice has been made the other building en-velopes are extinguished. Another alternative relies upon the “no-build/build zone” concept used in the past by the Virginia Outdoors Foundation and others in their easements. This approach identifi es particularly sensitive portions of a property, such as scenic views, karst formations, streams or wetlands, and draws a line around these features prohibiting any new structures inside the line, which is the “no-build zone.” New structures can be located anywhere outside of the no-build zone — the “build zone.” However, this approach raises an “incon-sistent use” 13 issue: If structures can be located According a basis to preservation credits could be a signifi cant benefi t to Virginia easement donors, depending upon how (and if) the Treasury Department fi gures that basis. anywhere within the build zone, the IRS may argue either (1) that there are no conservation values worth protecting within the build zone, and if that is the case why should there be any tax benefi ts for protecting it?; or (2) the right to locate structures anywhere within the build zone constitutes reservation of an “inconsis-tent use,” which is grounds to deny the entire deduction. To anticipate such arguments, easement documents, or baselines, 14 should include spe-REAL PROPERTY | Vol. 68 | October 2019 | VIRGINIA LAWYER 31